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The Impact of Fiscal Policy on the Output And Inflation

Author

Listed:
  • Ndari Surjaningsih

    (Bank Indonesia)

  • G. A. Diah Utari

    (Bank Indonesia)

  • Budi Trisnanto

    (Bank Indonesia)

Abstract

This study examines the impact of fiscal policy on output and inflation, along with a look at discretionary fiscal policy and how it impacts the volatility of output and inflation. Model Vector Error Correction Model (VECM) was applied over quarterly data, covering the period 1990 to 2009. Empirical results showed that there is a co integration relationship between government spending and taxes with respect to output in the long-run. Unlike government spending, in the long-term, taxation has a positive effect on economic growth. Short-term adjustment suggests that an increase in government spending has a positive effect on output, while a tax increase has a negative effect. There is a greater influence of government spending on output in the short term compared to taxation policies. Therefore, government spending is more effective to stimulate economic growth especially in times of recession, compared to taxation policies. While the increase in government spending causes a decrease in inflation, tax increases lead to higher inflation. This study also indicates the absence of discretionary fiscal policy made by the government of Indonesia.

Suggested Citation

  • Ndari Surjaningsih & G. A. Diah Utari & Budi Trisnanto, 2012. "The Impact of Fiscal Policy on the Output And Inflation," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 14(4), pages 367-396, April.
    • Handle: RePEc:idn:journl:v:14:y:2012:i:4g:p:367-396
    DOI: https://doi.org/10.21098/bemp.v14i4.409
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    More about this item

    Keywords

    Inflation; output; fiscal policy; tax; discretionary; VECM;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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